The macroeconomic drivers of stock market development: Evidence from Hong Kong

Abstract

This paper examines the macroeconomic drivers of stock market development in Hong Kong during the period 1992Q4 to 2016Q3. Specifically, it investigates the impact of banking sector development, economic growth, the inflation rate, the exchange rate, trade openness and stock market liquidity on stock market development. By employing autoregressive distributed lag (ARDL) bounds testing procedure, we find that banking sector development and economic growth have positive impacts on stock market development, whereas the inflation rate and the exchange rate have negative impacts on stock market development both in the long and short run. In addition, the results show that trade openness has a positive long-run impact but a negative short-run impact on stock market development. Policy recommendations are provided based on these findings.